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The Opinion of the U.S. Bankruptcy Court in the Huber case sent a powerful tremor through parts of the asset protection planning community -- namely, the part that had convinced itself that Domestic Asset Protection Trusts (DAPTs) actually lived up to its name. Unfortunately for those planners, the Court in Huber basically validated the concerns of DAPT critics on two major issues, both decided against the DAPT.

First, the Court held that Bankruptcy Code 548(e) operates to set aside "self-settled trusts" where the intent of the trust was to defeat the rights of creditors. Second, the Court held that Washington state law, and not Alaska law (where the DAPT was formed) would control, with very negative ramifications for the particular debtor in that case.

Huber was, in fact, only the second case to have directly considered DAPTs. The other case was the Mortensen decision, and it was also a bad case for DAPTs. But that is only two cases, and both were decided on bad facts.

Nonetheless, the language of Huber has caused some DAPT planners to begin to accept that maybe the critics of DAPTs were right after all, and so they should have a backup plan. Thus, in the last few days, there has been considerable discussion about whether a certain new variant of asset protection trusts might take their place.

Whether called a "SPA Trust" or a "Hybrid Trust", the idea is the same: The Trust is created by a Settlor, who does not make himself a beneficiary of the Trust. Instead, the Settlor's family members are the beneficiaries, just like any traditional estate planning trust. With such a traditional trust, the asset protection for the beneficiaries against their creditors is almost perfect -- there are very few cases in the recorded history of Anglo-American jurisprudence where such trusts have been invaded by a creditor a beneficiary.

While a traditional trust may be good for beneficiaries, for the settlor these trusts may not be so appealing since the settlor is not a beneficiary and does not have access to the trust assets during the settlor's lifetime.

Thus, here is the twist: The Trust is drafted so that somebody other than the settlor, let's say a golf buddy, has some power to later make the settlor a beneficiary. So, the settlor doesn't start out as a beneficiary, and in fact the settlor may never be made a beneficiary, but later if the settlor wants to be a beneficiary then he or she can give their buddy a nudge and become a beneficiary -- sounds pretty slick, right?

Well, maybe.

The problem is our old friend, section 548(e) of the Bankruptcy Code, which negates transfers to "a self-settled trust or similar device". We all know what a self-settled trust is -- a trust that somebody creates where they are a beneficiary. What we have little idea about is the term "similar device", since Congress intentionally left that term broadly encompassing and vague so that things that are like a self-settled trust would be sucked into the vortex of 548(e).

Would "similar device" include a trust where the debtor was not a beneficiary now, but could be made a beneficiary in the future, i.e., a "springing beneficiary"? Nobody knows, and nobody will know until some opinions are handed down by the courts on the issue.

What the courts seem to have focused on in the cases so far is whether the trust involved was intended to defeat the rights of creditors, in keeping with subsection 548(e)(1)(D), which provides:

the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

In other words, if a purpose of the trust was to defeat creditors of the settlor/beneficiary, then it might be a "similar device" even if not exactly a self-settled trust.

How might a court know such to be the case? The settlor/beneficiary will usually deny such was his or her reason for setting up the trust, so no joy there. Instead, the creditor will probably put on proof that either:

(1) the settlor was in financial distress and thus looking for a solution to cheat his or her creditors; or

(2) the trust was of a type that was marketed for asset protection purposes.

As to the first point, and as has been pointed out in probably hundreds of professional articles that have discussed the subject, asset protection is not about helping a financially distressed debtor to cheat their legitimate creditors. If a person is underwater, then probably no strategy involving a trust will be suitable for them -- debtors should be paying their creditors instead of funding trusts. I'll call this the "impending doom" test, and it is easy enough for planners to figure out.

It is the second type of proof that is more interesting. If a particular type of trust is marketed as an asset protection vehicle, then it has a good chance of being characterized as a "similar device" even if it is not a traditional self-settled trust. We now start to see SPA Trusts and Hybrid Trusts marketed for that very reason.

While this might seem like an odd result -- one should not use an asset protection trust for asset protection -- it is actually entirely consistent with a basic tenant of asset protection planning: Aside from exemption planning, planning that is meant to have an asset protective effective should be done for any other reason than asset protection planning, so as to avoid the actual intent element of fraudulent transfer law (and, now, the "similar device" language of 548(e)).